Maxicare emerges from bankruptcy to face key challenges.

Maxicare emerges from bankruptcy to face key challenges

Stepping out of bankruptcy last week, Los Angeles-based Maxicare Health Plans Inc. emerged into the bright light of a competitive Southland health insurance market, where the 229,000-member health maintenance organization faces three daunting industry trends:

* Employers such as the state of California, phone company Pacific Bell and oil giant Arco are slashing the number of HMOs each offers to employees, citing heavy paperwork bills. Already, Maxicare has been excluded from those three organizations, with a total of more than 400,000 employees.

* Big traditional health insurers, such as Woodland Hills-based Blue Cross and San Francisco-based Blue Shield, are increasing their push into the HMO market. Blue Shield in June moved into Los Angeles and has already signed 5,000 members into its HMO, and in November it marched into Long Beach and Orange County.

* A July study by Milliman & Robertson, an insurance industry think tank, said competitive pressures will blunt health insurance rate hikes and cause losses starting in 1992, with smaller profits predicted for 1991.

Nevertheless, Maxicare top gun Peter Ratican, 46, chairman and chief executive, last week declared his HMO is ready for the fight after 21 months in Chapter 11.

"We probably will spend more money next year advertising, and we will compete by offering better service," said Ratican. "In reorganization, we went through our list of providers (doctors and hospitals) and cut those who didn't understand our system of health care ... and we cut those with whom we didn't make money."

As a contract-model HMO, Maxicare arranges for doctors and hospitals to provide health care to enrollees, who are employees of companies that have chosen Maxicare as a health plan.

In the bankruptcy settlement, doctors and hospitals received a 49 percent ownership stake in Maxicare, noted Ratican, who added "that makes us unique -- our providers are very supportive of us."

And now that Maxicare is free from the stigma of bankruptcy, said Ratican, employers are exhibiting interest in returning to the fold.

"Already, in our first day out of bankruptcy, we signed on a big employer who was waiting for us to emerge, and I think we will get 6,000 emrollees out of it," said Ratican, who declined to identify the employer. "We are playing on a level playing field now, and can compete with all the big competitors."

Ratican conceded the trend of employers reducing the HMOs they offer to employees is important.

Last week Los Angeles-based Arco confirmed it will reduce to 30 from 45 the number of HMOs offered to workers, while the state of California began procedures to cut to 20 from 28 its approved HMO list, a change that will affect 28,000 state workers. Pacific Bell, the San Francisco-based telephone utility, has reduced to less than nine from 20 the number of HMOs offered employees, as part of a two-year-long program.

But Ratican noted that Maxicare is signed up with many large employers, such as Sears & Roebuck, GTE, the federal government, Bank of America and Price Waterhouse. "We have our large accounts too," he said.

If the health care market is different today, it also is a far different Maxicare that Ratican commands compared with firm he inherited in August 1988.

Where Maxicare once had 2.3 million enrollees in 28 states, today it has 239,000 in seven states, the bulk of which are Californians.

Where Maxicare used to carry $460 million in long-term corporate IOUs on its balance sheet -- money borrowed to finance big acquisitions in 1986 -- today that debt has been reduced to $67 million, not payable for five years.

And where Maxicare used to trade on the NASDAQ stock exchange, it is now 98 percent owned by former bondholders, banks and creditors (mostly doctors and hospitals).

The original shareholders, who once held 30.6 million shares of stock -- worth as much as $28.50 each in 1987 or about $1 billion -- lost nearly everything.

Maxicare has earned praise for its cutbacks and emergence from Chapter 11.

"It's a testament to the skill of the Maxicare management that they have come this far," said Roger Greaves, chief executive at the 770,000-member HealthNet, a12-year-old HMO based in Woodland Hills.

In the third quarter, Maxicare reported earnings, after an extraordinary gain, of $696,000 on revenues of $95.5 million.

Maxicare has no facilities or doctors of its own, unlike industry giant Kaiser Permanente. But like Kaiser, Maxicare signs up employers, which in turn offer Maxicare to employees.

Maxicare agrees to arrange for health care to employees in exchange for fixed monthly premiums. There is an element of risk in this: If employees should become more sick than expected, Maxicare still has to pay for health care, no matter the costs. Actuarial tables are used, and deals are haggled with doctors and hospitals to reduce risk and eke out profits.

Despite the risks, big players are in the market -- and pushing for more.

For example, last month the insurer Blue Shield of California expanded the geographic area covered by its Southern California HMO plan to include Long Beach, Whittier, El Monte and Covina in Los Angeles County and the northern half of Orang County, in addition to its existing coverage of most of central and northern Los Angeles County.

Already Blue Shield has 5,000 enrollees, and is advertising heavily for the 30,000 Southlanders it hopes to sign up in 1991. "I can tell you our ad budget is as large or larger than other HMOs'," said Cindy Gentry Barron, Blue Shield marketing director. "And we are going to be more aggressive next year than this, in print, on billboards and on radio."

Blue Cross, another traditional insurer that has jumped into the managed health care business, has enrolled 310,000 into its four-year-old CaliforniaCare HMO program statewide. "We added 60,000 members this year," said Bernard Crowley, vice president and executive director. "And our 1991 advertising budget is larger than 1990's."

Additionally, Blue Cross has more than 1.5 million members statewide in its "Prudent Buyer" program, a preferred provider organization. In a PPO, doctors and hospitals agree to provide health care to enrollees for negotiated discount rates.

And industry behemoth Kaiser Permanente has more than 2 million members in the Southland, and is building facilities to accommodate more.

For all the insurers, HMOs and other health plans, the 1990s promise to start off on a left foot, according to a July report by Millaman & Robertson, a research house based in Chicago.

The health insurance industry operates in three-year cycles, according to Millaman & Robertson, which are nearly as regular as the Biblical years of famine and feast.

For three years the industry enjoys profits and rising rates. Then the profits attract new competition and allow rate-cutting, leading to three years of loss. The losses drive out weaklings and cause rates to rise, leading to three years of profits again.

The year 1991 will be the last of a three-year profit cycle, reported Millaman & Robertson. The group researched the trend back to 1965 and found no irregularities in the cycle, based upon national profits and losses of the big Blue Cross and Blue Shield insurers.

At Maxicare, they are aware of the cycle but say they can hack it.

"this has always been a tough business," commented Greaves of HealthNet last week. "And the 1990s are only going to get tougher."